Peak inflation appears to be in the past for major economies like the US and Europe, but questions remain regarding the speed of deceleration. We expect the Federal Reserve (Fed) to remain on hold at 5.5% for the remainder of 2023. The market’s strong risk appetite seems to reflect more aggressive expectations for Fed rate cuts in 2024 along with 10% growth in corporate earnings—i.e., anticipation of a soft landing.

The global manufacturing Purchasing Manager’s Index (PMI) has been below 50, which indicates contraction, for 12 straight months. Global services continued to hold up better than global manufacturing. Deflation in China and the impairment of its credit creation process with housing under severe strain is consistent with a downturn scenario. Europe is also stagnating. These are all potential headwinds for the US, which has held up relatively well.

By The Loomis Sayles Macro Strategies Group

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